Learning Objectives

Understand the main differences between economic systems found around the world Learn ways of classifying countries by their market development Understand consumption patterns in different countries Know the main regional economic co-operation agreements

The World Economy - OverviewDuring the last 50 years: Emergence of global markets Integration of world economy Capital movements are driving force Trade in services and goods is roughly $4 trillion a year Production is uncoupled from employment Macroeconomics of individual countries no longer control economic outcomes

Economic SystemsThree types of economic systems: Capitalist Socialist Mixed Classification based on dominant method of resource allocation Market allocation Command allocation Mixed system

Economic Systems Market AllocationRelies upon consumers to allocate resources Role of state Promote competition Ensure consumer protection Predominately market economies: US, Western European Countries, Japan

Economic Systems Command Allocation

State has broad powers to serve public interest Decides which products to make Decides how to make them Countries that relied upon command allocation systems for decades: China, former USSR, India

Economic Systems Mixed Systems

In reality, no pure market or command allocation systems among the worlds economies In OECD (Org of economic cooperation and development) countries, the portion of command system is high e.g 32% in US to 64% in Sweden

Economic SystemsIndex of Economic Freedom (Source: Heritage

Foundation- Parameters trade policy, taxation policy, govt consumption of economic output, capital flows,foreign investment,wages, price control) Free: Hong Kong, Singapore, New Zealand, , Bahrain, Luxembourg, US, Mostly Free Canada, Chile, El Salvador,Taiwan Mostly Unfree : Cambodia. Mexico, Slovak , Slovenia, Swaziland Repressed North Korea, Iraq, Libya, Somalia, Cuba

Stages of Market DevelopmentCountries/markets are at different stages of development GNP per capita provides a useful way of grouping countries into 5 categories Categories are a useful basis for: Market segmentation Target marketing

Country Income Segmentation$10,726 High Income (Advanced Countries) -Triad + $3,466-10,725 Upper Middle Income (NICs) + $876-3465 < $875 Lower Middle Income (DCs)

Lower Income (LDCs) Basket Cases (BCs)-Ethiopia,

Mozambique

Stages of Market Development High Income CountriesGNP per capita above $10,726 Luxembourg- $65,602, Norway at $59,768, Account for 16% of world population and 82% of GNP. Post-Industrial Countries Importance of service sector more than 50% of GNP Ascendancy of knowledge over capital

Stages of Market Development Upper Middle Income CountriesGNP per capita between $3,466 and $ 10,725. 7% of world polpulation and 7% of GNP. Characteristics Rising wages High rates of literacy Advanced education Experience rapidly, export-driven economic growth Become formidable competitors eg Malaysia

Stages of Market Development Lower Middle Income CountriesAlso called less developed countries (LDC's) GNP per capita between $875 and $3,465 Constitute 39% of world population and 11% of GNP Characteristics Early stages of industrialization Expanding consumer markets Consumer mkts expanding. Major competitive advantage in the production of mature, standardized, labor-intensive products eg Indonesia.

Stages of Market Development Low Income CountriesIncome per capita less than $875 (constitute 37%

world population and 3% of world GNP) Characteristics Limited industrialization High birth rates Low literacy rates Heavy reliance on foreign aid Political instability Concentration in Africa, south of the Sahara

Stages of Market Development Basket CasesA country with economic, social & political problems that are so serious they make the country unattractive for investment and operations Low-income, no-growth countries (E.g.. Ethiopia)

Stages of Economic DevelopmentStages of market development based on GNP per capita correspond with the stages of economic development Low & lower-middle-income countries = less developed countries (LDCs) Upper- middle-income countries = industrializing countries High-income countries = advanced, industrialized & postindustrial

Income and Purchasing Power (1)Income Single most important indicator of market potential Purchasing Power Parities Comparison of goods & services that can be bought with local currency in different countries Gross National Product (GNP) Sum of the money values of all final goods & services produced during a year

Income and Purchasing Power (2)Top 10 Nations ranked by GNP/Capita (2005) Luxembourg Norway Singapore Switzerland Kuwait Japan Denmark United States Hong Kong Austria

Marketing & Economic DevelopmentDoes marketing play an important role in the economic development of a country? Is marketing only relevant to conditions that apply in affluent, industrialized countries? The marketing process of focusing an organizations resources on environmental opportunities is a process of universal relevance

Balance of PaymentsA record of all economic transactions between residents of a country & the rest of the world Capital Account records Long-term direct investment, Portfolio investment, Other short & long-term capital flows Current Account records Trade in merchandise & service, Private gifts, Public aid transactions between countries

Trade PatternsWorld merchandise trade has grown faster than world production during the last 50 years Top 5 exporting countries Germany China USA Japan France Top 5 importing countries USA Germany United Kingdom France Japan

Summary

Economic environment is major determinant of global market potential & opportunity World economies can be categorized into market allocation systems, command allocation systems, & mixed systems For many products, most important indicator of market potential is income